Terminals (Nz) Ltd v Comptroller of Customs

JurisdictionNew Zealand
JudgeGlazebrook J
Judgment Date06 December 2013
Neutral Citation[2013] NZSC 139
Docket NumberSC 6/2013
CourtSupreme Court
Date06 December 2013
BETWEEN
Terminals (Nz) Limited
Appellant
and
Comptroller Of Customs
Respondent

[2013] NZSC 139

Court:

Elias CJ, McGrath William Young Glazebrook Gault JJ

SC 6/2013

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from Court of Appeal's decision that the blending of butane with motor spirit (petrol) constituted “manufacture” under s2 Customs and Excise Act 1996 (“CEA”) (interpretation) — addition of butane increased the volume of the pre-existing motor spirit — appellant owned and operated a facility where it stored petrol for its sister company Gull New Zealand Ltd — it dispatched stored fuel products for transportation by road to fuel retailers in the North Island — respondent contended that the blending constituted manufacturing, with the consequence that the appellant ought to have been paying duty at a higher rate on the full volume of motor spirit resulting from the process — whether blending constituted “any operation, or process, involved in the production of the motor spirit under s2 CEA — whether the expressions “manufacture” and “production” required there to be a process where the resulting goods were intrinsically different from the component ingredients used — what was the correct approach to the statutory interpretation of taxation legislation.

Counsel:

R E Harrison QC and A C Sorrell for Appellant

M S R Palmer and S M Kinsler for Respondent

  • A The appeal is dismissed..

  • B Costs of $25,000 plus usual disbursements (to be determined by the Registrar if necessary) are to be paid to the respondent. We certify for two counsel..

JUDGMENT OF THE COURT

REASONS

(Given by Glazebrook J)

Table of Contents

Para No

Introduction

[1]

The legislative background

[7]

Issues in the appeal

[14]

Definition of manufacture

[17]

The parties’ contentions

[18]

The processes involved

[20]

Composition of motor spirit

[22]

Our assessment

[26]

Approach to the interpretation of taxation statutes

[35]

Terminals' contention

[35]

Our assessment

[39]

Caselaw on the terms “manufacture” and “production”

[42]

Terminals' submissions

[42]

The Comptroller's submissions

[45]

Our assessment

[46]

Legislative history

[50]

Terminals' submissions

[50]

Legislative history

[52]

The definition of manufacturing as first introduced

[58]

The effect of the 2002 amendment

[65]

Different limbs of the definition

[73]

Terminals' submissions

[73]

Our assessment

[74]

Double taxation

[77]

Terminals' submissions

[77]

Our assessment

[79]

Conclusion

[81]

Result

[82]

Introduction
1

Terminals (NZ) Ltd owns and operates a facility at Mt Maunganui, where it stores motor spirit (petrol), diesel and other fuel products for its sister company, Gull New Zealand Ltd. It also stores motor spirit for BP New Zealand Ltd. As and when requested by Gull or BP, it dispatches stored fuel products (usually into a bulk fuel tanker) for transportation by road to fuel retailers in the North Island. 1

2

Since 2003, as part of its operations, Terminals has blended butane 2 with motor spirit. The total volume of the pre-existing motor spirit is increased during this process so that, if five litres of butane is added to 100 litres of motor spirit, this produces 105 litres of motor spirit. 3

3

The question in this appeal is whether this blending of motor spirit with butane constitutes “manufacture” for the purposes of the Customs and Excise Act

1996. 4 In other words, the issue is whether the blending constitutes “any operation, or process, involved in the production of the [motor spirit]”. 5 The Comptroller of Customs contends that it does, with the consequence that Terminals ought to have been paying duty at a higher rate on the full volume of motor spirit resulting from the process. Terminal's position is that it does not and that no further duty is payable
4

In broad terms, the Customs and Excise Act imposes excise and excise-equivalent duties on specified categories of locally manufactured and imported goods. 6 Butane and motor spirits are both specified goods for excise duty purposes. The issue arises because the rates of duty for butane and motor spirits are different (10 cents per litre for butane compared with 48 cents per litre for motor spirit). 7

5

In this case, the motor spirit used is imported into New Zealand and excise duty is paid on it at the 48 cent rate. The butane is manufactured in New Zealand and duty is paid on it at the 10 cent rate. The Comptroller has made a provisional assessment of the duty payable on the product resulting from the blending process at 48 cents per litre but has allowed a credit for the duty already paid on the two constituent goods. 8

6

In the High Court, Mallon J made a declaration that the Terminals operation was not “manufacturing” under the Customs and Excise Act, “with the result that

excise tax at the motor spirit rate is not payable on the butane”. 9 That decision was reversed by the Court of Appeal. 10 Leave to appeal to this Court was granted on the issue of whether the activities of Terminals amounted to the manufacture of motor spirit. 11
The legislative background
7

Excise duty is an indirect tax on consumption. While it is imposed on the importer or the manufacturer, the consumer ultimately bears the economic burden of the duty as it will be passed onto the consumer in the form of a higher price. Excise duty is levied by reference to a specific unit 12 (“per litre” 13 in the case of fuel). This enables the tax to be hypothecated or earmarked for specific social expenditure. In the case of motor spirits, since 1927 excise duty has largely been earmarked for the purpose of contributing towards the cost of transport infrastructure. 14

8

Excise duty 15 is imposed on three categories of goods: tobacco, fuel and alcohol, including food items containing alcohol. 16 Excise duty on manufactured goods is imposed by s 73, while excise-equivalent duty on imported goods is imposed under's 75 of the Customs and Excise Act.

9

The Customs and Excise Act provides for a system of control by the New Zealand Customs Service within Customs controlled areas (CCAs). 17 Both imported goods and manufactured excisable goods remain subject to the control of Customs from the time of importation or manufacture until they are lawfully removed from a CCA for home consumption or export. 18 Goods are deemed to be removed for home consumption when the goods are physically removed from the CCA unless they are moved to another CCA with the approval of the Chief Executive of Customs or they are removed for export. 19

10

No one may manufacture goods that are subject to excise duty, except in a manufacturing area licensed under the Customs and Excise Act. 20 Under subs 10(a) 21 no area may be used to manufacture excisable goods unless it is in a CCA. 22 Excise-equivalent duty and excise duty are payable only at the time that imported or manufactured goods pass the entry for home consumption or, are

removed for home consumption, respectively. 23 As the excise regime is a domestic consumption tax, excise duties are not payable on exported goods. Where goods are imported for the purposes of manufacture, the payment of duty can be deferred until after the manufacturing process is completed and the goods are removed for home consumption. 24 If duty has already been paid on imported goods that are later used in the manufacture of excisable goods, a credit is available under's 85:

85 Duty credits

  • (1) Where the licensee of a manufacturing area purchases materials or goods for use in manufacture, the licensee may, at the time of making an entry for home consumption as required by section 70, claim, as a credit, excise duty or excise-equivalent duty paid in respect of those materials or goods.

  • (3) The amount of the excise duty or excise-equivalent duty that may be claimed by the licensee of a manufacturing area as a credit relating to materials—

    • (a) to which subsection (1) applies, is the amount of excise duty or excise-equivalent duty originally paid by the licensee of a Customs controlled area, importer, or owner in respect of the materials; or

    • (b) to which subsection (2) applies, is the amount of excise duty or excise-equivalent duty paid by the licensee—

11

The rates of duty are set out in a Duties Table, which may be modified from time to time. 25 Part A of that table sets out the rates of duty in relation to specified goods manufactured in New Zealand. Part B provides the rates of duty for imported

goods. The excise rates for motor spirit and butane are, however, the same for both imported and manufactured goods. 26
12

The term “manufacture” is defined in the Customs and Excise Act as follows: 27

manufacture, in relation to goods specified in the Excise and Excise-equivalent Duties Table, means,—

  • (a) if the goods are tobacco, the process of cutting, pressing, grinding, crushing, or rubbing raw or leaf tobacco, or otherwise preparing raw or leaf tobacco or manufactured or partially manufactured tobacco, and of making cigarettes whether from duty-paid or from non-duty-paid tobacco, and of putting up for use or consumption scraps, waste, chippings, stems, or deposits of tobacco resulting from processing tobacco:

  • (b) if the goods are a fuel, any operation, or process, involved in the production of the goods:

  • (c) if the goods are neither tobacco nor a fuel,—

  • (i) any operation, or process, involved in the production of the goods; and

  • (ii) any ancillary process (as defined in subsection (3)) that takes place on premises that are not licensed, or required to be licensed, under the Sale of Liquor Act 1989

13

The section 2(3) definition of “ancillary process” includes filtering, diluting and blending the specified alcohol...

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